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Taxation in Matching Markets

59 Pages Posted: 30 Oct 2017  

Arnaud Dupuy

Centre de Recherche en Économie Appliquée (CREA)

Alfred Galichon

NYU, Department of Economics and Courant Institute

Sonia Jaffe

University of Chicago

Scott Duke Kominers

Harvard University

Date Written: October 27, 2017

Abstract

We analyze the effects of taxation in two-sided matching markets, i.e. markets in which all agents have heterogeneous preferences over potential partners. In matching markets, taxes can generate inefficiency on the allocative margin by changing who is matched to whom, even if the number of workers at each firm is unaffected. While the allocative inefficiency of taxation need not be monotonic in the level of the tax when transfers flow in both directions, we show that it is weakly increasing in the tax rate for markets in which workers refuse to match without a positive wage.

We introduce a renormalization that allows for an equivalence between markets with taxation and markets without taxation but with adjusted match values. We use our equivalence to show additional properties of matching markets with taxation and to adapt existing econometric methods to such markets. We then estimate the preferences in the college-coach US football matching market and show through simulations of tax reforms that the true deadweight loss can differ dramatically from that measured without accounting for the preference heterogeneity of the matching market.

In addition to highlighting the potential for allocative distortions from taxation, our model provides a continuous link between canonical models of matching with and without transfers.

Keywords: matching markets, taxation, labor markets

JEL Classification: C78, D3, H2, J3

Suggested Citation

Dupuy, Arnaud and Galichon, Alfred and Jaffe, Sonia and Kominers, Scott Duke, Taxation in Matching Markets (October 27, 2017). Available at SSRN: https://ssrn.com/abstract=3060746

Arnaud Dupuy

Centre de Recherche en Économie Appliquée (CREA) ( email )

Campus Limpertsberg
162A, avenue de la Faïencerie
Luxembourg, 1511
Luxembourg

Alfred Galichon

NYU, Department of Economics and Courant Institute ( email )

269 Mercer Street, 7th Floor
New York, NY 10011
United States

Sonia Jaffe (Contact Author)

University of Chicago ( email )

1101 East 58th Street
Chicago, IL 60637
United States

Scott Kominers

Harvard University ( email )

Rock Center
Harvard Business School
Boston, MA 02163
United States

HOME PAGE: http://www.scottkom.com/

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